The simplest way for the new Government to reduce conflicts of interest in financial advice and to lower its cost would be to change the definitions of “advice” in the Corporations Act to let more accountants into the game. Specifically, the definition of what actually is financial product advice should be narrowed and, within that, the line between general and personal advice should be moved, so there is more “general” and less “personal”.
The fundamental aim of this, in my view, should be twofold: to reduce the number of people who have to get an Australian Financial Services licence (AFSL) and, secondly, to cut down the number of Statements of Advice (SoAs) that have to be issued. The two big costs in giving advice are the requirements around holding the licence and the work needed to put together an SoA. The test should be whether more accountants are giving advice on whether to set up a self-managed super fund and what to invest the money in, and whether super funds are providing advice to their members on the investment options.
At the moment they can’t do those things. The Minister for Superannuation and Corporate Law, Senator Nick Sherry, pointed out in a speech recently: “Accountants can advise on setting up SMSFs, which is half the equation. However, unlicensed accountants should not provide advice on the relative merits of establishing an SMSF compared with other products, nor can they advise the trustees of the SMSF on what to invest in.
This is the other, important, half of the equation.” If the definition of financial product advice was shifted slightly, and the definition of “general advice”, as opposed to “personal advice”, was broadened, competition would bring the price of advice down, and clients would have a wider choice of advisers who did not have conflicts of interest.
Here is the current definition of financial product advice: “For the purposes of this Chapter, financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that: (a) is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or (b) could reasonably be regarded as being intended to have such an influence.”
The accepted legal wisdom currently is that the phrases “in relation to” and “class of financial products” mean you can’t even talk about, say, property or shares in general without a licence. I’m no lawyer, but if “in relation to” was changed to “for the purposes of buying or selling”, and the phrase “class of financial products” was simply removed, the need for a licence would suddenly be narrowed down to providing advice about whether to buy a specific product – in other words, sales. In that event accountants would be able to talk sensibly to their clients about whether an SMSF is better for them than a large super fund, and then how much of the money should be in which class of assets.
Here are the definitions of “personal advice” and “general advice”: “ For the purposes of this Chapter, personal advice is financial product advice that is given or directed to a person (including by electronic means) in circumstances where: (a) the provider of the advice has considered one or more of the person’s objectives, financial situation and needs; (b) a reasonable person might expect the provider to have considered one or more of those matters. For the purposes of this Chapter, general advice is financial product advice that is not personal advice.”
The definition of “personal advice” is far too broad. The Government should change the legislation to encourage the development of a new industry of independent financial advisers who don’t sell products – they just advise.
Alan Kohler has been a financial journalist for 37 years and is currently the publisher of The Eureka Report , an online, independent publication for investors.